General Electric (NYSE: GE) stock is up 39% year-to-date, a welcome relief for its patient shareholders. General Electric stock has still lost two-thirds of its value overall in the past three years. A bloated balance sheet, a core business in decline, and some questionable management has put GE in a difficult position.
Since taking over in October of last year, new CEO Larry Culp seems to have GE on track. Culp has addressed many of the near-term concerns about GE stock and is executing his turnaround strategy well. However, with the stock up significantly from its recent lows, investors may be getting ahead of themselves. There’s still not much to like about General Electric stock in the long-term.
The Positives of GE Stock
The good news for the owners of GE stock is that the deterioration of GE’s financial situation seems to have stabilized for now. Culp found a buyer for GE’s biopharma business and obtained $21 billion for the unit. In January, GE even restructured its transportation spin-off deal with Wabtec to raise even more capital to shore up its bloated balance sheet.
GE stock rallied in April after the company reported first-quarter earnings and revenue beats, led by $1.7 billion in profits from its aviation segment.
After yet another guidance cut in March, investors are optimistic that GE has finally set expectations at a realistic level. As long as GE doesn’t throw investors any more curveballs and continues to execute its strategy of streamlining its business and improving its balance sheet, the bottom may be in for GE stock.
The Negatives of GE Stock
Unfortunately, just because GE’s share price may not be going lower doesn’t mean it’s going higher. Yes, the company has taken meaningful steps to address its near-term balance sheet concerns. But as recently as February, ratings agency Fitch cut its outlook for GE’s credit from “stable” to “negative.”
GE’s core Power business reported a 71% drop in operating income in the first quarter. GE’s industrial free cash flow in the quarter was negative $1.2 billion. The company’s updated guidance is calling for up to negative $2 billion in industrial cash flow in 2019.
At a conference in late May, Culp reiterated the company’s call for at least $1 billion in negative free cash flow in the second quarter.
I could go on and on about how bad things will be for GE in 2019. But those who are bullish on GE stock aren’t in the dark about the company’s problems. They are buying General Electric stock because they believe the bottom is in on GE stock and that Culp’s turnaround plan will eventually get GE back on track. Unfortunately, it’s not yet clear what the best-case scenario for GE actually is.
Analysts Are Skeptical About GE’s Turnaround
In April, JPMorgan analyst Stephen Tusa downgraded GE stock from “neutral” to “underperform.” Tusa said there’s simply no reason to expect GE’s cash flow to rise meaningfully.
“The Street is significantly over projecting the bounce in FCF in the coming years, off levels that we calculate at zero currently, as Power/Renewables remains weak, GECS will likely consume material cash for the foreseeable future, Aviation fundamentals, as per underlying FCF, are weaker than meet the eye, while lingering sector high leverage including entitlements leaves the company vulnerable to liquidity issues in the event of a recession,” Tusa wrote.
Tusa’s downgrade came just weeks after Gordon Haskett analyst John Inch said any GE bull calling for cash flow to eventually return to $1 per share is living in a fantasy world.
“Considering GE’s divestitures of high cash generating businesses coupled with Power’s substantial long-term challenges, this aspirational target screens as both dubious and lacking basic intuition,” Inch wrote.
The Bottom Line on General Electric Stock
Yes, the bottom may be in for GE stock. Yes, so far Culp has proven he may be the right man for the job. His strategy and execution appears to have stopped the bleeding by GE’s business. Yes, the string of guidance cuts may finally be over. Yes, the balance sheet has stabilized compared to the dicey period in the second half of 2018.
The worst-case scenario seems to be off the table. But GE stock has rallied nearly 40% this year, seemingly simply because things are no longer getting worse. Things will need to get meaningfully better for the rally to continue in the long-term. Unfortunately, there is little evidence at this point that GE can live up to the market’s expectations.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
